Property
lawyer Jeffrey Lai unwittingly breached the Fair Trading Act assisting in
negotiations over finance where his client misrepresented levels of debt
financing in a 2013 purchase of Orcon for $38 miilion. Justice Fogarty did not award damages to an
aggrieved investor who lost most of his $200,000 investment, ruling Mr Lai did
not knowingly breach the Act.
Mr Lai represented Mr
Warren Hurst in negotiations to buy telecommunications company Orcon in March
2013. Mr Hurst was hustling to fill a
six million dollar funding gap over and above $22 million put up by ASB and ten
million dollars left in as vendor finance.
Mr Hurst had previously borrowed $100,000 privately from a business
acquaintance, Mr Greg McAlister. He
offered Mr McAlister a job as CEO at Orcon together with a chance to invest in
the deal. Mr McAlister had industry
experience with both Telecom and Vodafone.
The High Court was told
Mr McAlister agreed to put up $200,000 in return for a convertible note. Calculation of the ratio for conversion to
equity hinged on the starting level of equity capital in the new business. Evidence was given of calculations based on
equity of $8.5 million. During a day of
hectic negotiations with the sale deadline looming, Mr Lai assisted with some
back of the envelope calculations for a suitable conversion rate. It transpired that unbeknown to Mr McAlister
the Orcon purchase was to be entirely debt funded. Mr Hurst was intending to raise further cash
with a sale and leaseback of some Orcon assets netting $3.25 million (incurring
subsequent monthly expenses of $150,000) and by folding his company Vivid
Networks Ltd, which he valued at $2.5 million, into the new Orcon group.
A subsequent cashflow
crisis saw Mr Hurst bankrupted and Mr McAlister getting back only $7800 of his
original $200,000 investment. With Mr
Hurst bankrupt, Mr McAlister sued Mr Lai alleging false and misleading
behaviour in misrepresenting the level of equity capital supporting his
convertible note investment.
Justice Fogarty said Mr
Lai had not been involved in discussions about Mr McAlister’s possible
investment. One day before the Orcon
purchase was due to close, Mr Lai was present at a meeting between Mr Hurst and
Mr McAlister and assisted in settling terms of the $200,000 convertible note. Mr Lai was in breach of the Fair Trading Act
by omitting to clarify the extent to which the Orcon purchase was debt funded.
Mr Hurst was the
primary actor in misrepresenting the equity component of the Orcon deal,
Justice Fogarty said. As the secondary
actor, Mr Lai needed to have knowingly misrepresented the equity component
before having to pay damages, he said. There
was no evidence that Mr Lai had turned his mind to the question of Mr McAlister
being misled when he used figures being bandied about to make some rough
conversion calculations.
McAlister
v. Lai – High Court (27.04.17)
17.035